Readers’ questions: “What is an indemnity policy?” 6 June 2006Posted by Law-talking Guy in Readers' questions.
This one can get confusing because there are a few different things with very similar names involved.
Let’s start with the word ‘indemnity’. The Oxford Dictionary of Law (which, incidentally, contains a misleading definition of ‘indemnity insurance policy’) defines it as:
“An agreement by one person (X) to pay to another person (Y) sums that are owed, or may become owed, to him by a third person (Z). It is not conditional on the third person defaulting on the payment, i.e. Y can sue X without first demanding payment from Z. If it IS conditional on the third person’s default […] it is not an indemnity but a guarantee.”
Under a policy of indemnity insurance, the insurer agrees to indemnify the insured against specified costs or losses which may be incurred in the future (which means that if the insured incurs such costs or losses then the insurer will pay for them instead, up to an agreed maximum. Now let’s move on to the various forms this can take.
High Loan-to-Value fee or Mortgage Indemnity Guarantee (“MIG”)
This is what the Oxford Dictionary of Law thinks an indemnity insurance policy is. Some lenders make a charge if you borrow a high proportion of the value of a property. This usually pays for the lender to take out indemnity insurance in case you default on the loan. The key thing here is that the policy is for the lender’s benefit only and, if it pays out, the insurer will seek to recover from you everything they pay to the lender. This indemnity policy should therefore not be confused with mortgage payment protection.
Professional Indemnity Insurance (e.g. Solicitors’ Indemnity Insurance)
This is the insurance cover that professionals (e.g. solicitors, doctors, accountants) are required to have in place. If a professional is negligent (for example) and becomes liable to a third party (usually a client) for costs and/or compensation, this is what pays out. Refer to my previous article The Definitive Conveyancing Quotation for a discussion of how some solicitors hide their fees by charging an ‘indemnity contribution’ as a disbursement (not to be confused with the genuine indemnity policies mentioned below).
Indemnity Insurance Policies in Residential Conveyancing
Residential conveyancing is a battle. There are so many things that lawyers have to check that most properties do have something ‘wrong’ with their legal title. This may be a serious problem (e.g. lack of mutually enforceable covenants in a lease, meaning that you can’t force the other tenants in the block to stick to the terms of their leases, which makes a lease defective and must be remedied) or a bureaucratic problem (e.g. some lawyers’ inability to take a practical view of matters, or a mortgage company’s stipulation).
An indemnity policy in the sense usually meant in residential conveyancing is a policy with a one-off fee which covers a specific defect in the title. The policy usually pays out if the defect results in a loss.
No one will know at the outset of a transaction whether an indemnity policy will be necessary (except in the case of a re-mortgage where an indemnity policy is being taken out in place of undertaking a local search).
Two prolific providers of indemnity insurance policies are Countrywide Legal Indemnities and Guaranteed Conveyancing Solutions. Both provide lawyers with self-issue packs, which enable lawyers to issue a range of common policies on demand. Solicitors must reveal to you any commission they are paid and get your permission to keep it (not sure about licensed conveyancers) so you can be sure they have no financial interest in proposing a particular policy. Some common policies are:
• Lack of planning permission
• Lack of building regulations consent
• Restrictive covenant (may be necessary if a covenant is being breached – often taken out by developers at vast expense)
• Lack of consent for building over a sewer (pays out if the water board tear down your house to get at the sewer)
• Local search delay/expiry/omission
• Maisonette (covers a number of common defects found in maisonette leases)
• Absentee landlord (and a number of other leasehold problems)
The cost of these policies varies, depending on the value of the property and the type of policy required. Costs may run from £25 to £250 or more.
If a policy is required then the buyer’s solicitor should advise them fully on the terms of the policy (give them a copy of the terms and conditions and statutory disclosure document, explain what they have to do, why it’s necessary, what the alternatives are, explain what it covers, when it pays out and how much etc).
It will nearly always be the buyer’s solicitor (after checking the draft contract package) who discovers a defect and asks for an indemnity policy to be put in place at the seller’s expense. The seller’s solicitor will advise their client on whether it is necessary to pay for the policy and will often write back as a matter of course saying “if the buyer wants it they can pay for it” as a way of starting negotiations. Inexperienced lawyers are often particularly eager to ask for a policy (as they do not yet have the confidence required to take a reasonable view and want to cover their backs) and can get quite insistent. Sometimes it will be clear that a policy is unnecessary and sometimes it will be equally clear that one is required. However, in the majority of cases it will end up being a matter of negotiation between the buyer and the seller. It is not unusual for a seller to pay £50 for a policy rather than hold up the sale while the other side dickers. Another common strategy is for the seller and buyer to agree to share the cost of the policy.
The most frequently requested policies are for lack of building regulations consent. This is because of a widely misunderstood case (described on the RICS website as a ‘licence to print money’ for local authority surveyors) called Cottingham v Attey Bower & Jones, in which a firm of solicitors was held negligent because they had not adequately investigated whether works had building regulations consent. The works subsequently required £30,000 worth of repairs (Attey Bower didn’t have to pay very much of it, however, as the clients’ contributory negligence in not having a survey counted against them). One key point that was highlighted was that the belief that the council could not take any enforcement action after 12 months was erroneous, because the council could still apply for an injunction at any time.
Many lawyers have interpreted this to mean that they must now get a copy of the building regulations approval for any works. The usual bugbear is knocking through the kitchen into the lounge 20 or 30 years ago. There are an incredible number of properties that have had this done. The problem is that most councils don’t keep records of building regulations more than four or five years back. They will often conduct searches of their archived records for £150 or so (hence the ‘licence to print money’ quote) but what if they don’t turn up an approval? The chance to get an indemnity policy for lack of building regulations has passed (as you have alerted the council and the insurer will no longer cover it) so your only remedy is to pay for the council to come out and inspect the works. They will require you to expose the works for the inspection and you will then have to fix the damage afterwards. In all this is a very expensive (and completely unnecessary) rigmarole.
Ask any building control officer:
1. Whether they care if someone knocked a wall through without consent twenty years ago; and
2. If they have the budget to go to court to get an injunction for every knocked through wall in their borough.
The answer will almost certainly be, “no”. The only time it might be REASONABLE to believe that an injunction might be obtained would be if the works were dangerous. If that is the case then the buyer’s full structural survey will pick it up.
Another issue is to consider what good an indemnity policy is if there are structural defects. A policy for lack of building regulations will usually cover the cost of complying with any enforcement notice served by the council. As we have seen, the chance of enforcement is negligible. What is far more likely (and what happened in the case of Cottingham) is that you will have to pay out yourself to fix structural defects. If you have not had a structural survey then you will have no recourse to your surveyor or to the insurer (remember they only pay out if the council take action, not if your roof falls down).
Having said all that, a lack of building regulations policy could be useful in the case of fairly recent works where a survey reveals no defects and the buyer is in a hurry (if the buyer is not in a hurry then the correct thing to do for recent works is to insist that the seller get the council round to look at them and pay for any necessary remedial work). This CPL article takes a very pragmatic view,
I have spent a lot of time talking about these particular policies, but there are other instances where a policy may or may not be appropriate, e.g. breach of a 1835 covenant not to build more than one house on the land. In general, if a covenant has been openly and uninterruptedly breached for 20 years then a waiver is presumed (Hepworth v Pickles 1900 – conveyancers in the audience refer to Emmett 19.082). If the house was over 20 years old then you could safely do without a policy.
Another common covenant prohibits alterations to the property without the builder’s consent. Often these date from the 1940s and it is usually impossible to locate the builder’s successor in title. In such cases an indemnity policy might be appropriate to cover any potential enforcement against a recent extension.
As with nearly everything in conveyancing, there is no simple answer; it will depend almost entirely on the facts of the case. However, I hope this has been of some help in highlighting some of the issues involves.
This is not legal advice; refer to standard disclaimer, of course.